Insurance Asset Risk Awards 2021 - UK & Europe

Preparing for climate change

Conning's chief investment officer for Europe, Russell Büsst, and global product manager, Matt Lightwood, explain why climate change poses a major investment risk for insurers and how Conning's expertise can make a big difference

Why is climate risk such a threat to insurers?

Russell BüsstRussell Büsst: Climate change affects both sides of insurers' balance sheets, likely impacting the liability side of the balance sheet, whilst driving a potential need for increases in capital and reserves.

Up until about two years ago, insurers focused on climate risk almost entirely on the liabilities side of the balance sheet.

Chief investment officers at insurers are now also seeking to address climate risk, and this comes at a time when there is regulatory and shareholder pressure.

For most investors, the focus on climate change has been the split between transition risk and physical risk. For example, in the auto sector, the transition risks from climate change are broadly negative, except for electric car manufacturers.

The threats are that businesses - whether the companies we invest in or the insurance industry per se - do not respond sufficiently quickly to climate change risk, and what appears to be a relatively small risk on the asset side of the balance sheet becomes a significant risk as markets and commercial pressures develop.

Matt Lightwood: Climate risk also creates modelling risk for insurers. This is a different risk than insurers are typically used to dealing with, as there is no precedent to use as the basis for building models and there are so many possible paths climate change could take.

How is Conning helping insurers tackle climate risk?

Matt LightwoodMatt Lightwood: A lot of insurers are struggling with making climate stress tests implementable within a risk management framework. That is what we have been developing at Conning in terms of methodologies and tools that help insurers take things like the Prudential Regulation Authority stress tests and make them implementable within the context of the Orsa.

Conning launched a risk reporting service for insurers in 2020. Do you plan to update the tool this year?

Matt Lightwood: We are currently producing climate risk reports for clients, but we are very busy developing the system into a web-based software-as-a-service offering, so that users will be able to more easily get their hands on the scenario analysis tool, called the Conning Climate Risk Analyzer. That will be released in early March.

We are already actively engaged with several mid-sized insurers interested in using the tool, and we expect that to grow exponentially in the next two years.

Later in the year, we are also planning additional climate-related functionality in our software, such as ESG [environmental, social and governance] indices within our economic scenario generator.

For high carbon-emitting sectors, is divestment or engagement the best approach?

Russell Büsst: Divestment is not the answer, but rather it should be about engagement and monitoring. I think it is important to assess companies on an individual basis. We accept there are objectives and targets, and we do the same for our clients.

But at the same time, I think just ditching a company because of a single metric is not necessarily the right thing to do.

I totally understand that a retail-based business may say it does not want any carbon exposure. However, from a long-term perspective, for our client base, it has to be more nuanced than that.

Why does Conning's expertise stand out from its competitors?

Matt Lightwood: We have developed a solution that is truly implementable and can be achieved without requiring swathes of really expensive data to drive it.

When I look at the competition, there is a lot of very expensive consulting type work going on, whereas we have developed a tool that is standardised and pre-packaged. Every mid-sized insurer would have the resources to implement it.